Pension funds to make up 40% of hedge fund capital

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EUROPE – Corporate pension funds are planning to boost investment in hedge funds and are likely to comprise some 40% of hedge fund source capital by the end of the year, second only to private investors, according to a survey published by Goldman Sachs.

The survey, conducted at the European Hedge Fund Symposium in Monaco in April, also reveals that distressed debt is set to see the strongest growth, with funds saying they will increase exposure by over 30%.

However, US equity and convertible bond arbitrage, as well as merger arbitrage investments are likely to lose exposure by the end of the year.

Exposure to US hedge fund investments is likely to fall by around 8%, while total weighting in Japanese investments should increase by almost 20%, and other Asian investments should also increase by around 10%, according to the survey. Global hedge fund investment is also favoured as a growing sector by the symposium participants.

More than half (52%) of respondents at the symposium were representatives of funds of funds, 18% were institutional investors and 27% private investors. Future investment strategies varied between the groups, even if both funds of funds and private investors agreed on increasing exposure to distressed debt and decreasing it in US equity and convertible bond arbitrage.

While funds of funds anticipate investing more in equity market neutral and multi-strategy arbitrage vehicles, private investors considered themselves to be over-exposed to these classes. Funds of funds, however, are planning to decrease investment in global macro and fixed income arbitrage vehicles, while private investors are going to significantly increase exposure to these asset classes. Individual investors are currently less exposed to global macro, fixed income arbitrage and short bias funds, than funds of funds.

The surveyed investors are mainly experienced hedge fund users, with 55% having invested in the asset class for more than five years, and 32% with two to five years of experience. The hedge fund investors included in the survey comprise 24% UK investors, 13% US residents and 13% Swiss investors. Only 8% claimed to be from the rest of Europe, 2% from the Middle East, and 40% did not disclose their location. Private investors are still the largest group of hedge fund investors, comprising nearly 60% of those surveyed at the symposium, with private banks, insurance funds, endowments and foundations, and retail investors all ahead of corporate pension funds as a source of capital.